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FHA streamline refinances: A cure for the underwater blues?

Posted by  on Jul 22, 2012
 

If you currently have an FHA-insured mortgage and are interested in refinancing, you may qualify for an FHA streamline refinance -- a unique type of loan that allows borrowers to bypass some of the typical steps of a mortgage refinance.

The biggest benefit of an FHA streamline refinance is that no property appraisal is required, so you may qualify even if you owe more than your home is worth. And while the FHA doesn't require a credit check or minimum credit score for borrowers on streamline loans, some lenders may still set a minimum score. Typically, lenders require a minimum credit score of 620 or 640 to approve an FHA mortgage loan.

Steps to take for an FHA streamline refinance

  1. Make a plan. Before you undertake any refinance plan, you need to decide on your goals. If you want to reduce your monthly payments, you'll likely want to refinance into a 30-year fixed-rate mortgage loan. If you want to pay off your home faster, you may want to check out a shorter loan term to see if you handle the payments. If you plan to move within a year or two, it may not make sense to refinance at all because of the time it will take to recoup your costs.
  2. Find out if qualify. While other FHA programs are available for refinancing, the streamline refinance program is limited to borrowers who currently have an FHA loan. In addition, you must be up-to-date on your payments, with no late or partial payments for the past year. Your loan also must be at least 210 days old, with six payments already made.
  3. Estimate your mortgage insurance. All FHA mortgage loans require both upfront and monthly mortgage insurance payments. The amount you'll pay on a streamline refinance depends on the size of the loan and when you closed on your current loan. If your current loan has been in place since before June 1, 2009, you'll pay a lower mortgage insurance rate.

If you want to take cash out from your home equity, you won't be able to do that with a streamline refinance. Your loan balance can't be increased by the cost of refinancing, either, so you'll need to either pay cash for the loan origination fees or work with a lender who will pay for your closing costs. Typically, the latter means you'll pay a slightly higher interest rate.

One last FHA requirement is that you must demonstrate a benefit of refinancing, either by a reduced monthly payment or switching from an adjustable-rate to a fixed-rate mortgage.

If you're a current FHA borrower who has avoided approaching a mortgage lender because your home dropped in value or your credit score has dipped, you may want to contact a lender to discuss whether an FHA streamline refinance can help you lower your mortgage costs.

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